Subscribe to the Bombay Chartered Accountant Journal Subscribe Now!

April 2013

Capital gains: Forfeiture of earnest money: Section 51 r/w. s. 4: A. Y. 2007-08: Earnest money forfeited on cancellation of sale agreement is capital receipt: Not taxable as income:

By K. B. Bhujle, Advocate
Reading Time 2 mins
fiogf49gjkf0d
CIT vs. Meera Goyal; 30 Taxman.com (Del):

The assessee entered into an agreement to sell his house property to a company and in terms of agreement received certain sum as earnest money Since purchaser failed to pay balance consideration by stipulated period, the assessee forfeited the earnest money and claimed same as capital receipt. The Additional Commissioner on reference u/s. 144A directed the Assessing Officer to the effect that earned money so received and forfeited was to be adjusted against the cost of property and capital gain was to be worked out on the basis of the resultant cost as and when the property was sold. However, the Assessing Officer held that entire transaction was a sham transaction in which purchaser attempted to book bogus losses. He accordingly made addition of the forfeited amount. The Commissioner (Appeals) deleted the addition. The Tribunal upheld the order of Commissioner (Appeals) observing that the earnest money was received through banking channels and genuineness of the receipt was not in dispute.

On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:

“i) The Tribunal has rightly noted that the provisions of section 51 would come into play as it specifically covers this type of a transaction. Once the transaction has been held to be genuine, there is no question of the transaction being without any consideration.

ii) Consequently, there is no merit in the revenue’s appeal, much less any substantial question of law.”

You May Also Like